World economy: A global shock to the system

Global capitalism faces its worst crisis since 1945.

The collapse of the US housing bubble has triggered an economic slowdown and the subprime finance crisis. These forces threaten a global financial crisis and a serious downturn in the world economy. Lynn Walsh analyses these developments and their implications.

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A global shock to the system

Global capitalism faces its worse crisis since the end of the second world war. “This is not a normal crisis”, financier George Soros told the gloomy delegates attending this year’s Davos forum of big business leaders. “We are at the end of an era of credit expansion…” The world economy faces a combination of financial crisis and economic slowdown, both originating in the heartland of US capitalism, with the two trends reinforcing each other. The fantasy of ‘decoupling’, according to which Europe, Asia and other economies could grow independently of the US, has already been dispelled by the beginnings of a slowdown in Europe and Asia. Instead, there is, in reality, a ‘recoupling’, as the US slowdown impacts on the rest of the world. Inevitably, if the US goes down it will drag the rest of the world with it, to a greater or lesser extent. The forces that have produced the US downturn have taken a year or so to develop, and the effects of a US recession will take time to work through the world economy.

The collapse of the subprime housing loan market in the US is a major crisis in its own right. Major banks like Citicorp, the world’s biggest bank, have announced record losses – Citicorp was forced to write off $18 billion in dodgy housing loans. Altogether, US and European banks have written off over $120 billion, and there is undoubtedly much more to come.

More recently, the previously unknown ‘monolines’, the bond insurers, which have come to play a key role in the bond and securities markets, have been forced to announce huge losses, with the US authorities now trying to mount a $15 billion rescue of a number of these bodies.

In the week beginning 21 January, stock exchange speculators around the world at last began to catch up with reality, waking up to the growing evidence of a US and world recession. Shares plunged between 6-10% on major exchanges, and are now between 15-20% down on last October’s peak prices. A 20% fall is officially a ‘bear’ market.

The huge losses (€4.9bn, $7.2bn) incurred by the French bank, Société Générale, as a result of a rogue trader, is another symptom of the crisis. The forced sell-off of shares by the bank to cover its losses may have contributed to the sharp fall on major stock exchanges. But it is absurd to try to blame the crash on the hapless Jérôme Kerviel. In reality, SocGen’s losses were just one symptom of a general crisis, at most exacerbating the problem. It is predictable that Kerviel’s fraud will only be the first of many that will be uncovered in coming months, just as the Enron crisis in 2001 was followed by a series of scandals involving big corporations like WorldCom and a whole string of top investment banks.

Alarmed by worldwide stock exchange falls, Ben Bernanke, chair of the US Federal Reserve, dramatically cut interest rates by 0.75% to 3.5%, the biggest single rate cut since 1983. This move stabilised stock markets, with many regaining their previous levels. However, lower interest rates, while they may ease the immediate liquidity crisis, will not overcome the paralysis of the financial system – and stock exchanges will continue to be highly volatile.

These events were reflected at Davos, the annual forum for capitalist leaders, where the optimism of last year – stimulated by record profits and bonuses for the bankers – was replaced by doom and gloom. Most Davos delegates considered Bernanke’s rate cuts ‘too little, too late’. “There are hardly any dissenters from the view that the US is in recession – the debate is only over how deeply and for how long”. (Lex, Financial Times, 22 January) Beyond wealthy financial circles, however, Bernanke’s move has reinforced the view that the Fed is always ready to step in to help wealthy investors, but not so helpful when it comes to helping working people.

Already, the financial crisis and the prospect of a serious downturn have shaken confidence in the ‘magic of the marketplace’. Global economic crisis will have a profound effect on the consciousness of the working class and labouring poor around the world. In the US, a pro-free market commentator, David Brooks, warned of “a backlash against Wall Street and finance sweep[ing] across a recession haunted country”. (International Herald Tribune, 26 January)

US recession

After slowing down last year, US capitalism is now sliding into recession. The only questions are how deep will it be and how long will it last? Given the combination of a housing slump, a severe credit squeeze and a crisis in the financial system, the downturn will clearly be more serious than the relatively shallow recessions of 1990-91 and 2001. The credit crunch, which has only just begun, will increasingly retard economic growth, while minimal or negative growth will exacerbate the financial crisis. This vicious circle makes it most likely there will be negative growth for two or more quarters (the official definition of a recession), followed by a slow and painful recovery.

The puncturing of the housing bubble is a key factor in the US economic slowdown. House prices were pushed up by the flood of cheap housing loans, allowing many home owners to convert part of their equity into additional spending power. This boosted consumer spending (even more than the ‘wealth effect’ from the 1990s share bubble) which accounts for 70% of the US economy. At the peak of the bubble, home owners were drawing $700 billion a year from their homes. This has now fallen to under $200 billion.

To extend the scope of their highly profitable home loans business, many of the banks and other dodgy mortgage lenders developed the ‘subprime’ mortgage sector, lending to people who could not really afford to purchase their homes. Borrowers were seduced with low ‘teaser’ rates which subsequently shot up, interest-only repayment schemes (which only work out when house prices continue to rise), no down payments, etc. Now there are revelations of deception and outright fraud by property agents, mortgage brokers, etc, who made huge fees out of the subprime operation. The banks which ultimately financed the operation convinced themselves that they had abolished the inherent risks involved by securitising the loans, bundling them into complex packages that were sold on to investors.

The excesses of the subprime mortgage market have now rebounded on the finance sector, triggering a generalised liquidity and credit crisis. Moreover, as the recession deepens, the loans crisis is spreading to many ‘prime’ borrowers who are being hit by unemployment and squeezed incomes. In fact, the piling up of housing debt is proving to be a disaster for many working-class and middle-class families.

There is now a glut of unsold houses, and the rising number of foreclosures will add to the problem. House prices are down 6% from the peak (10% in real, inflation-adjusted terms). But the house price ‘correction’ is far from complete: prices are likely to fall by 20% or 30%, which would wipe out between $4-6 trillion of housing equity.

The subprime sector alone will result in about two million foreclosures (repossessions), while a 30% fall in house prices would plunge over ten million households into negative equity (owing more than the value of their houses).

As mortgage borrowing has slowed, credit card and other forms of consumer debt have risen. The household debt ratio is now 136%. At the same time, people have been hit by higher petrol and heating fuel prices. Sales over the Christmas holiday were down, and unemployment rose sharply in December. It was the biggest rise in the unemployment rate since the 9/11 attacks in 2001. In December there was an increase of only 18,000 jobs with the private sector actually losing 13,000 jobs. Despite the increase in manufacturing exports, the manufacturing sector lost 31,000 jobs in December (bringing the total lost for 2007 to 183,000). After growing about 2% in 2006, both hourly and weekly earnings fell in 2007. The poor job figures, issued at the beginning of January, were one of the signals which prepared the way for the stock exchange plunge on 21 January.

The growth of corporate profits, which soared to record levels in recent years, has also begun to slow down. For the S&P 500 companies, profits per share declined by 2.8% in the third quarter of 2007 compared with the previous year. “An earnings recession is now under way”, commented a Morgan Stanley analyst in December (Morgan Stanley GEF, 3 December 2007). “Pressures on profit margins will contribute to weaker capital spending and perhaps depress hiring”.

Clearly, the liquidity squeeze (shortage of ready cash) that began last summer has turned into a full-blown credit squeeze (shortage of capital) which is now affecting wider and wider sections of the economy. A protracted credit squeeze is likely to produce a severe downturn, but if this turns into a systemic breakdown of the financial system, US capitalism could be plunged into an even deeper downturn.

Is there a way out?

Can action by the Federal Reserve and US government avert a recession? Bernanke’s 0.75% cut in the base rate on 22 January was designed to further ease the credit crisis and reassure Wall Street investors. The Fed may cut rates further over the next few months. But the general view of capitalist policymakers (reflected in the reaction at Davos) is that it is ‘too little, too late’. When overstretched banks and financial institutions are facing a shortage of capital, a lower base rate, in itself, will not solve the problem. Moreover, since the subprime crisis erupted last August, all lenders have become much more restrictive, imposing tighter conditions and higher interest rates on both company and household borrowers. This situation could continue for a prolonged period, even if the Fed further reduces rates.

On 23 January, George Bush and congressional leaders agreed a stimulus package in an attempt to head off a recession. The package amounts to around $150 billion or 1% of US GDP. Bush dropped his earlier demand to make his previous tax cuts (for the super-rich and big corporations) permanent but the ‘compromise’ negotiated with House of Representatives Democrats is mainly based on tax rebates and other tax concessions that will mainly benefit the wealthy and big business. Bush conceded that every worker earning less than $75,000 would receive a $300 rebate, including many who are currently paying no tax. At the same time, the package will pay additional amounts to higher earners and business. This means that most of the money will go to people who are well off and are unlikely to spend the extra cash immediately. The package does not include measures advocated by some Democrats, for increased state spending on schools and infrastructure and emergency aid to state and local governments (whose tax revenues are being undermined by the property crash and economic slowdown).

The package has yet to be approved by the Senate Democrats, but its main ingredients seem clear. The Democratic leader, Nancy Pelosi, described it as “a remarkable package”, but New York Times columnist, Paul Krugman, commented: “The worst of it is that the Democrats, who should have been in a strong position… appear to have caved in almost completely… They extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent…” (International Herald Tribune, 26 January 2008)

This fiscal stimulus package will not avert a recession, which is already gaining momentum, though it may cushion the downturn after a time lag.

Neither the Fed’s interest rate cut nor Bush’s fiscal package will reverse the housing slump or rapidly overcome the colossal debt burden of the financial sector. Even if interest rates are reduced to a lower level (to a near-zero level in real terms, given current inflation), they will not succeed in reviving the economy through another credit-driven housing boom. In this respect, the lesson of Japanese capitalism in the 1990s is clear. Japan’s massive debt-overhang from its frenzied property boom of the late 1980s paralysed the economy for over a decade, and still weighs to some extent on the economy. Neither negative real interest rates nor a series of massive government spending packages succeeded in stimulating sustained growth in the Japanese economy. “In 2001”, comments Wolfgang Munchau, “the US got away with an unusually short recession helped by aggressive interest rate cuts and an expansionary fiscal policy. But in Japan in the early 1990s, and in Germany in the early part of this decade, it took ages for low interest rates to help the real economy”. (Financial Times, 20 January 2008)

Nor will increased exports provide an easy way out for US capitalism. Exports have grown faster recently, but they account for only 12% of GDP. Such is the deindustrialisation which has taken place over the last three decades, the US could only significantly increase its export growth on the basis of large-scale capital investment in new plant and equipment, which is unlikely to take place under existing conditions. Moreover, a slowdown in the rest of the world will cut the markets for US exports.

Financial crisis

Us capitalism is gripped by a severe credit crisis, which is spreading to Britain and other European economies. This financial crisis was triggered by the US subprime meltdown, which brought massive losses to major banks like Citicorp and investment banks like Merrill Lynch. Over 200 US housing lenders have gone bankrupt, and more will follow. The subprime losses in the US, Britain, Germany and France already surpass $120 billion, and could rise to $250 billion or $500 billion. As the credit crunch spreads to other sectors, the total losses could be colossal.

The shaky housing loan sector, however, is only part of the huge superstructure of inflated assets – shares, currencies, derivatives, credit swaps, commodities, etc. The trading of these assets was all based on the use of huge amounts of credit (leverage) and reliance on complex financial instruments, such as derivatives, credit swaps, etc. In the US, for instance, reliance on debt rose from $1.50 per dollar of GDP growth during the post-war upswing to $3 in the 1990s, and to an unprecedented $4.50 per dollar of GDP growth in 2007. Now the whole edifice is threatened with collapse. The crisis has already spread to property investment companies (with Scottish Equitable recently suspending withdrawals) and, more crucially, to the ‘monolines’, the bond insurers who supposedly guarantee the investment grade quality of a huge range of municipal and company bonds.

Measures taken by the central banks, cutting the base interest rates and extending credit to the major banks, has eased the immediate liquidity crisis. Interbank lending, which completely seized up when the subprime crisis broke last August, has begun to function again (though at higher rates of interest than before). But this has not eased the credit crisis. The major banks are hoarding capital, fearing further losses which they cannot at this stage fully calculate. In recent years, the banks made loans to borrowers on a huge scale and then packaged them into securities which were then sold on to investors. This proved extremely profitable for the banks and other financial intermediaries. The use of derivatives, it was claimed, spread the risk of losses as a result of borrowers’ defaults, virtually abolishing risk. Ultimately, however, the shadow banking system which developed, largely free from any government or central bank regulation, broke down under the impact of rising subprime housing defaults in the US.

Suddenly, the big banks were forced to take direct responsibility for their ‘off balance-sheet operations’, conducted through various arms-length investment vehicles. Now, even though the immediate liquidity crisis has eased, the banks have become much more restrictive in their lending, imposing tighter conditions and charging higher interest rates (despite the fall in central bank rates).

Chain reaction

When the crisis came in the form of the subprime crisis, there was panic throughout the banks and other financial institutions. No one knew where the risk was – in fact, risk was generalised, the whole credit system was contaminated by toxic loans, many of them as yet unidentified.

The subprime crisis marked the beginning of a chain reaction which is still continuing. The crisis of the monolines, the bond insurers, has now come to the fore. Altogether, the monolines are estimated to be insuring $2,400 billion-worth of bonds. However, the increased risk of defaults on the insured bonds has raised the spectre that the monolines have insufficient capital to cover all likely losses. Ironically, the credit ratings of some of these monolines have now been downgraded, effectively making them insolvent. Two of the biggest, Ambac and NBIA, have combined losses of $8.5 billion – and there is currently a desperate rescue operation, mounted by Eric Dinallo, the New York State insurance supervisor, to raise $15 billion from major banks in order to prevent a collapse of the monoline sector. This hangs in the balance. If the rescue fails and a series of monoline insurers collapses, a systemic financial crisis could be triggered.

Some of the major banks, like Citicorp and Merrill Lynch, have gone with their begging bowls to the sovereign wealth funds, the investment funds set up by oil producers, China, etc, to channel their huge foreign currency reserves into investments in the advanced capitalist countries. This may prevent the bankruptcies of the major banks, but this source of additional capital is not available to the smaller banks, which are desperately hoarding cash and imposing tighter credit conditions on businesses and household borrowers.

The present crisis marks the end of the recent phase of globalisation, which has been dominated by frenzied financial speculation. This was fuelled by a tidal wave of cheap credit. This originated (as we have previously explained) in the surpluses of the oil exporters, China (with its huge trade surplus), and the excessive profits of the big corporations (based on the intensified exploitation of the proletariat combined with low levels of capital investment). This orgy of credit-fuelled speculation and profiteering inevitably reached its limits and has now resulted in a massive credit crunch. The massive burden of debt will now be a dead weight on the world economy, dragging the whole world economy into a recession.

An economic downturn is under way, and the only question is how serious it will be. However, there is also the possibility of a series of major financial crises, or even a systemic breakdown of the global system.

So far, the collapse of a major bank or finance house has been averted. But it is clear that a number of major institutions are facing not merely a credit crisis but the possibility of insolvency. However, the massive sell-off of shares by Société Générale, triggered by the discovery of a $7.2 billion (€4.9bn) fraud, apparently played a role in triggering the stock exchange falls in mid January. So far, Société Générale has been shored up, but there remains the possibility of a series of major banks or finance houses facing insolvency, which could trigger a much more serious crisis. The situation is far worse, for instance, than the collapse of the hedge fund, Long Term Capital Management, in 1998, which was rescued by a consortium of major US banks. Fortunately for US capitalism, LTCM turned out to be an isolated case.

Government and central banks are now calling for tighter regulation of a whole range of activities, especially the operations of the shadow banking system. But the damage has already been done, and it is too late to eradicate the effects of all the dubious operations of recent years, including outright fraud which will undoubtedly emerge. Central banks will undoubtedly attempt to prop up banks and ease the credit squeeze with lower interest rates. They may also try to collaborate in controlling wild gyrations in the world monetary system. But it is much harder for them to influence capital flows and currency alignments than in the past. Currently (according to the Bank for International Settlements), over $3.2 trillion is traded every day on world currency exchanges, a 70% increase from 2004.

Global outlook

The us recession will bring a global economic downturn. The crisis in the US financial system will in itself have a major impact. But from the point of view of production and trade, the US still has an immense influence. It accounts for 25% of world GDP and its consumer market is six times as big as those of India and China combined. When the US sneezes the rest of the world inevitably catches a cold. If the US gets a bad dose of flu, however, the rest of the world may well get pneumonia.

Over the last few years, the idea of ‘decoupling’ has been popular among both speculators and government policymakers. Europe and Asia, it was claimed, were increasing their own internal trade, becoming less reliant on the US market. This illusion arose on the basis of the slowdown of the US economy during 2007, while China, India and other economies were still accelerating. It was inevitable, however, that when the US went into recession, it would have a major impact on the Asian economies, as well as Europe and other regions. This has already been borne out by current trends.

Ironically, the decoupling argument was promoted by financial wizards at the investment bank, Goldman Sachs. Recently, however, a Goldman Sachs economist, Peter Berezin, announced an about-face: “What began as a US-specific shock is morphing into a global shock”. (Bloomberg, 7 December 2007) Of the 38 countries they monitor, Goldman expects growth to weaken in 26. Stephen Roach of Morgan Stanley, always sceptical about decoupling, commented: “The American consumer is the big gorilla on the demand side of the global economy. As the slowdown goes from housing to consumption, we will find the world is not as decoupled as it thinks”.

A recent report confirmed the impact that slower US growth is already having on Asian exporters. “From Chinese garment companies to Japanese equipment manufacturers, Asian exporters say they see weakening demand from the United States, a development with potentially wide-ranging effects for Asian economies”. (Exporters across Asia Brace for US Downturn, International Herald Tribune, 25 January)

A Chinese garment producer, for instance, reported a 20% fall in US demand this winter. “We anticipate that this year, 10-20% of the knitwear factories will have to close due to the inability to compete”, commented the sales manager of Evergreen Knitting, Ningbo, China.

Japan is also being hit: “Now we see ‘recoupling’. The economy of Japan is proving disappointingly fragile to external shocks”, commented a Goldman Sachs economist based in Tokyo. In November, exports to the US dropped in dollar terms compared with November 2006 for Japan, Malaysia, Thailand, Australia, Bangladesh, Sri Lanka, Cambodia and Indonesia.

Europe will also be hit by the US slowdown (apart from the impact of the financial crisis). Moreover, the housing bubbles in Britain, Spain, Ireland and other European countries are also in the process of deflating. Given the crucial role the housing bubble has played in driving consumer spending, there will undoubtedly be a slowdown in Europe, though it may not be so severe as the US and will vary from country to country.

The Chinese economy grew by 11.4% in 2007, the highest growth rate in 13 years. The trend of declining exports, however, will mean slowing growth in the next period. The idea that China could rapidly switch to stimulating domestic demand is fanciful. Low wage levels and huge inequalities mean that domestic purchasing power is extremely low. The rapid growth of the Chinese economy over recent decades has been structurally dependent on export growth, using the foreign currency revenue from exports to finance investment and the purchase of raw materials. The switch to dependence on internal demand would mean a painful readjustment, which could only take place over a considerable period of time.

Moreover, a collapse of China’s stock market as a result of the world financial crisis could have a major political impact in China. Paradoxically, the stock markets play very little part in China’s real economy. However, over 100 million people have invested in shares, mostly during the last few years of booming prices. A massive sell-off would wipe out the household savings, pension provision, etc, of millions of families who were encouraged to invest in the stock exchange by the Chinese government. “Large-scale public protest is a possibility: thousands of irate investors demonstrated at the headquarters of the ministry of finance the day after the increase in trading tax by 0.2% last May, precipitating an instant sell-off”. (Financial Times, 21 January)

It is also fanciful to believe, as some western commentators do, that household savings in China, and for that matter India and other Asian countries, can be used to finance a new growth cycle in the advanced capitalist countries. The lack of a social safety net, for instance, with the elimination of village communes and the ‘iron rice bowl’ provided by state-owned enterprises to their workers, has meant that families have tended to save more in order to provide for ill health and old age. They are not easily going to hand over their vital family savings to western capitalists, especially if they see investors burn their fingers in a crash of the Chinese stock exchanges.

World export growth will also be hit by a decline in the price of oil and other commodities, as world demand slackens. This will cause major problems for regimes that overwhelmingly depend on the revenue from commodity exports, for instance Putin in Russia, the Iranian regime, and the Chávez government in Venezuela. Moreover, their demand for imported manufactured goods will be severely reduced.

The Federal Reserve has cut US interest rates to 3.5% and other central banks (Bank of England, European Central Bank, etc) are likely to follow with rate cuts, though probably not so drastically. Lower interest rates will ease the liquidity problems of banks and businesses, but will not themselves overcome the credit crunch, or stimulate a revival of demand for goods and services.

Leaders of the Bank of England (Mervyn King) and the European Central Bank (Jean-Claude Trichet) have so far been reluctant to cut interest rates to the same extent as the Federal Reserve. They argue that there is still a serious danger of inflation, fearing the prospect of a return to ‘stagflation’ (as in the 1970s), combining slow or even negative growth with accelerating inflation.

How likely is this? In the short run, it appears that capitalism faces a more serious threat from recession or slump than from a revival of inflation. The main ingredients of inflation in the last period have been soaring oil and gas prices, commodity prices, food prices, etc. This is a product of rapid growth in China, India, etc. The prices of these commodities will decline as growth slows. At the same time, a slowdown of growth has a deflationary effect, with increased unemployment and lower wage levels accompanied by overcapacity and overproduction of goods.

Wage levels cannot seriously be blamed for higher inflation, as real wages have generally trailed behind rises in the cost of living. In the future, the threat of inflation could re-emerge, especially if US capitalism attempts to pay off its international debts by printing dollars, flooding the world with devalued dollars. However, in the short term it seems more likely that world capitalism faces a period of stagnation and deflationary trends similar to the position of Japan during its decade-long stagnation in the 1990s.

Major economies, particularly those with balance of payments deficits, will attempt to revive domestic growth through the growth of exports. But they will all be competing with one another in a shrinking world market. This may lead to competitive devaluation of their currencies in an effort to boost their export sales.

The incipient trade wars of the last few years, moreover, will escalate, with the adoption of more and more protectionist measures. The US, for instance, has had a certain growth of exports and may well encourage the decline of the dollar in order to promote its exports. However, a collapse of the dollar would provoke turmoil in the world currency system, aggravating the crisis in the world finance system.

Whatever the precise character of the unfolding downturn, whatever its duration, the coming period will be one of growing difficulties for world capitalism. The ‘successes’ of globalisation will evaporate, to be replaced by sharpened antagonisms between rival capitalist powers and intensified social and political crises.

Political consequences

Last year, we said that the subprime crisis and its repercussions marked a turning point, and this has now been amply confirmed. Global capitalism now faces a combined financial crisis and economic slowdown, which will interact and deepen the crisis. This marks the end of the recent phase of globalisation, which has been dominated by finance capital and a frenzied short-term drive for profit. For a few years, this promoted rapid growth in China and to a lesser extent the United States, the binary axis of the world economy. Now it has turned into its opposite, with a recession in the US that will drag China and the rest of the world down with it.

How has the crisis come about? The capitalists can blame nobody but themselves. The ‘success’ of globalisation has been undermined by the system’s inner contradictions.

In the last period the capitalists have surely had everything they could wish for. There has been the largely unfettered working of the free market, with little or no regulation of the shadowy financial networks that flourished in the period of securitisation, derivatives, etc. Governments of both ‘left’ and ‘right’ have promoted the interests of the banks, big corporations and the super-rich. The share of wages in the wealth produced has been reduced to record lows, while there has been an unprecedented surge in profits. Facing minimal taxation, the super-rich have enormously increased their share of the wealth.

Yet their system is once again in deep crisis and the working class and poor labourers internationally will pay the price. Millions will lose their jobs, their houses, and their modest savings. A serious recession – or to put it bluntly, a slump – possibly followed by a period of stagnation, will impose terrible hardships on the working class and the poor. In the case of a serious slump, workers can initially be shocked, preoccupied by the struggle for daily existence. But there can also be defensive struggles against attempts by the capitalists to offload the crisis onto the working class, such as the strikes we have seen in the recent period in Latin America, Germany, France and elsewhere.

The world economic crisis of capitalism, however, will also provoke a political crisis. The economic downturn, financial crises, and the events through which they will unfold, will have a profound effect on the consciousness of the working class, especially its advanced layers. Already there is a questioning of the viability and legitimacy of the free-market capitalist economy. The Financial Times columnist, Martin Wolf, a fervent advocate of globalisation and neo-liberal policies, recently wrote: “I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself”.

The more politicised workers will also increasingly challenge trade union and labour leaders who have embraced the market economy and support neo-liberal economic policies, who now act as a barrier against working-class struggle. There will be intensified battles to reclaim trade unions as democratic organisations of mass struggle, and renewed moves to establish new mass workers’ parties that can mobilise workers and give them a class voice.

Increasingly, rejection of a crisis-ridden capitalism will be reinforced among the conscious layers of workers by support for an alternative to capitalism based on democratic socialist planning on an international scale, together with workers’ democracy.

This article will appear in the February issue of Socialism Today, magazine of the Socialist Party (England and Wales)

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January 2008